Auditing Theory and Practice: Criteria, Considerations, Risk Factors, and Practices

This article discusses the criteria, considerations, risk factors, and practices related to auditing theory and practice. It covers topics such as evaluating integrity, risk consideration, independence considerations, audit risk factors, and practices for avoiding litigation issues.

Running head: AUDITING THEORY AND PRACTICE
Auditing theory and practice
Name of the university
Name of the student
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AUDITING THEORY AND PRACTICE
Table of Contents
Answer to question 1:......................................................................................................................2
Answer to question 2:......................................................................................................................2
Answer to question 3:......................................................................................................................2
Answer to question 4:......................................................................................................................2

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AUDITING THEORY AND PRACTICE
Answer to question 1:
Five criteria’s that should be considered by new audit partner at Wilson, Watson and
Shah (WWS) when accepting new clients are listed below:
 Evaluating integrity of prospective client- In order to evaluate integrity of Randall Inc, it
is required by new audit partner to personally meet with directors, senior managers and
owners. Verification of termination of clients’ relation with previous audit firms should
be done and that it was not because of disagreement regarding outstanding invoices and
business operations.
 Risk consideration related to engagement- For evaluation of risk, CPA firm should
consider the factors relating to specific engagement such as financial condition, turnover,
realization and profitability of engagement, future and current regulatory environment
(Bowlin et al.).
 Incorporating professional competence in performing engagement- Audit firm should
also consider whether they would be able to competently provide requested service
according to professional standards that are applicable (Knechel et al.).
 Investigation should be made into issues such as ethics, business procedures and policies,
staff qualifications, expectations reasonableness and bill payment by contact predecessor
audit firm of client.
 A credit history of financial planning and individual tax planning of clients should be
obtained. Reviewing of financial ratings and public records of entity should also be done.
Answer to question 2:
Five independent considerations of WWS related to potential new client Randall Inc are
listed below:

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 Examination of existing relationship of Randall Inc by auditor is one of the independent
considerations by WWS. Enquiry should be made by auditor whether the directors,
significant shareholders and management of potential clients and assessing the happening
of potential conflict by identifying that they are involved with existing clients (Bowlin et
al.).
 Appropriate officer of prospective clients should also be enquired if there exist any
relationship that would lead to potential independence impairment.
 Business risk of clients should be considered by audit firm by gaining strategic
understanding of their business.
 Performance measurement system of client should be considered by auditors for
assessing any manipulation of amounts and setting unreasonable objectives.
 Audit firm should consider the planned audit responses to specific risks in their overall
audit strategy throughout the audit plan development.
Answer to question 3:
Some key audit risk factors that should be considered by WWS for assessing new
potential client that is Randall Inc are listed below:
 It is required by new auditor to make the assessment of previous results and evaluating
the fact that misstatements that are found in auditing of previous year has the likelihood
of occurring again. Furthermore, the way organization take steps in making changes and
is the misstatement are systematic in nature, then this leads to arising of audit risk.
 Judgments in recording account transactions and balances also affect the risk of audit.
Moreover, complexities in transactions such as lease agreements, transactions using

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foreign currency and any leave entitlement related to issues of employees are also the
factors that impacts audit risk.
 Procedures of conducting audit also impacts the risks in auditing. One of the important
parts in audit risk determination is continuance and client acceptance (Messier et al.).
 Involvement of firm in any fraudulent financial reporting should be assessed by audit
firms. Such activities might involve intentional omission or misstatement of disclosures
or amount for deceiving users of financial statements. If the management takes some
deliberate actions for meeting objectives of earnings, then it affects the audit risk.
 Improper recording of non routine transactions such as acquisition of major property, fire
losses and making misstatements during process of conversion also influence the audit
risk (Gaynor and Lisa Milici).
Answer to question 4:
Three practices that could be implemented by WWS for avoiding litigation issues with
Randal Inc are as follows:
 Documentation of specific services- There should be separate engagement letters for each
service such as compilation of tax, audit review, consultation services and any other
services offered to acquire client.
 Setting of realization standards- The proposal of audit firm should be aligned with the
expected services to be delivered to clients and this would help in service
accomplishment objectives. Using compilation report should be restricted in
circumstances of high risk (Newton and Nathan).

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AUDITING THEORY AND PRACTICE
 Engagement with client should incorporate procedures and policies of quality control that
are intended to decrease exposure to legal liability. Such documentation should also
involve the applicability of such policy and job procedures.

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References list:
Bowlin, Kendall O., Jessen L. Hobson, and M. David Piercey. "The effects of auditor rotation,
professional skepticism, and interactions with managers on audit quality." The Accounting
Review 90.4 (2015): 1363-1393.
Gaynor, Lisa Milici, et al. "Understanding the relation between financial reporting quality and
audit quality." Auditing: A Journal of Practice & Theory 35.4 (2016): 1-22.
Knechel, W. Robert, and Steven E. Salterio. Auditing: Assurance and risk. Taylor & Francis,
2016.
Messier, William F., Steven M. Glover, and Douglas F. Prawitt. Auditing & Assurance Services:
A Systematic Approach. Qing hua da xue chu ban she, 2015.
Newton, Nathan J., et al. "Internal control opinion shopping and audit market competition." The
Accounting Review 91.2 (2015): 603-623.